the United States of America

Taxation.

The most notable development in the Federal revenue structure since 1913 has been the adoption and entrench ment of direct taxes, levied at progressive rates, as the basic source of public revenues. The Sixteenth Amendment, authoriz ing the Federal Government to "lay and collect taxes on incomes from whatever source derived" was ratified in 1913, and was utilized almost immediately in the Tariff Act of October 3 of that year. The entrance of the United States into the World War quickly caused income taxation, supplemented for a time by excess profits taxes, to take pre-eminent rank in the revenue sys tem. In 191o, more than 96 per cent. of the total internal revenue and customs receipts of the Federal Government was derived from customs duties and excise taxes on tobacco and alcoholic beverages; in 192o, 69 per cent., and in 1930, 66.5 per cent., was derived from income and profits taxes. The principles of direct and progressive taxation were also applied to estates, beginning with the Revenue Act of 1916.

The World War transformed the importance of Federal reve nues and expenditures in the economic life of the country. Prior to 1917, the total ordinary expenditures of the Federal Govern ment had exceeded a billion dollars only once. During the next six years, in contrast, total ordinary expenditures aggregated more than $48 billions. Similarly, prior to 1917, total ordinary receipts had never reached a billion dollars ; but during the next six years they aggregated more than $26 billions. Under the Revenue Act of 1918, the rates of tax on individual incomes of the year 1918 started at 6 per cent., after an exemption of $r,000 for a single person, $2,000 for a married person, and $200 for each dependent, and rose to 77 per cent. (65 per cent. surtax) on net incomes of over $1 million. The taxes on corporations included one-tenth of 1 per cent. on their capital stock in excess of $5,000, 12 per cent. on their net incomes, and combined War profits and excess profits taxes ranging up to 8o per cent. of profits in excess of certain credits, for the taxable year 1918. Many new taxes were imposed on commodities and business transactions.

Public Debt.

The enormous increase in taxation in 1917– 1920, while unprecedented in the previous history of the country, did not provide revenues sufficient to pay even one-half of the immediate financial cost of the War, inclusive of loans to foreign governments. The deficit financing made necessary by the prodigious financial costs of the War was conducted with re markable facility. The Federal Reserve System, which had been placed in operation in November 1914, played a valuable role in this connection. Bank loans secured by Government obliga tions were made eligible for rediscount by the Federal Reserve banks; and this fact enormously increased the disposition and ability of the American public to purchase the Government's obligations. The Treasury's principal practice was to obtain funds

initially through the issue of short-term certificates of indebted ness, which were sold mainly to banks, and subsequently to fund these loans into large popular bond issues. The five such War Loans issued during the War and post-Armistice periods raised an aggregate sum of approximately $21 billions; and the number of separate subscriptions ranged from approximately 4 millions for the First Liberty Loan to nearly 22.8 millions for the Fourth Liberty Loan. Immediately after the War, Congress provided for the systematic discharge of the public debt, which attained a peak of $26,594,267,878 on August 31, 1919. Before the close of President Wilson's second Administration on March 4, 1921, a reduction of more than $2.5 billions from this peak had already been achieved.

A further reduction of about $7.8 billions took place during the next ten years, as a result of receipts from foreign countries on account of their War Loans, the liquidation of Government invest ments and properties acquired mainly during the War, and the excess of tax revenues over expenditures. The reduction in the public debt during this period would have been far more rapid and substantial had it not been for a series of drastic tax reduc tions. After President Harding's inauguration, the excess profits tax on corporations was repealed (this was partially offset by an increase in the corporation income tax), the rates on individual incomes were reduced and a number of excise taxes eliminated (Revenue Act of 1921). In 1924, further reductions in individual income tax rates and excise duties were made. In 1926, sharp reductions were made in the income tax rates applicable to large individual incomes. The maximum surtax on individual incomes, which had previously been successively reduced from 65 per cent. to so per cent. and to 4o per cent., was now fixed at only 20 per cent. It is estimated that had no reductions been made in the individual income tax rates between 1921 and 193o, the gross pub lic debt could have been reduced by an additional $ro billions during this period. In other words, the interest-bearing public debt on June 30, 1930, would have been less than $6,000,000000 instead of $15,900,000,000. The 1926 Revenue Act also decreased the rate of tax on estates, increased the credit allowed for pay ment of State death taxes from 25% to 8o%, and repealed the gift tax and certain manufacturers' sales taxes. The corporation income tax was increased to 131%, but in 1928 it was cut to 12%.